Value Indices Explained

GLS’ Value Indices are designed to provide a tool by which SBA market participants can now benchmark SBA asset trading levels to determine relative value over time. We have decided to create these indices to cover the entire spectrum of maturities in the SBA 7(a) market. Utilizing the same maturity buckets as in our CPR analysis, there are 6 separate indexes, denoted as GLS VI-1 to VI-6, the numbers equating to the maturity buckets in increasing order, with VI-1 as <8 years and ending with VI-6 as 20+.

In addition to price and prepayment elements, we decided to include a funding element as well. Expressed as 1 or 3 month Libor, the addition of the funding element provides a proxy for investor funding rates and gives the indices sensitivity to the spread between the bond equivalent yield (BEY) of the pools in the index and the prevailing Libor rates.

The new Indices are basically weighted-average spreads to Libor, using the rolling six-month CPR for pools in the same maturity bucket, at the time of the transaction. While lifetime prepayment speeds would likely be lower for new loans entering the secondary market, utilizing six-month rolling pool speeds allowed us to make relative value judgments across different time periods.

In order to calculate the indices, we analyzed over 12,000 secondary market loan transactions, covering 39 months. We compared the bond-equivalent yields to the relevant Libor rate at the time of the transaction. We then broke the transactions into the six different maturity buckets and calculated the average Libor spread, weighting them by the loan size.

For these indices, the value can be viewed as the average spread to Libor, with a higher number equating to greater value in the trading levels of SBA 7(a) loans. In this context, we can now see that transactional “value” has three components (prepayment speed, price, and funding costs) each of which can, and do, move independently. Our Value Indices recognize this and provide investors with a consistent means by which they can determine whether the market for SBA assets is rich or cheap at any given time.